California Court Confirms That An Income Approach May Be Used To Value Mineral Resources In An Eminent Domain Proceeding
December 30th, 2014
Case Note Prepared by David A. Diepenbrock
San Diego Gas & Electric Company v. Schmidt, 228 Cal. App. 4th 1280 (2014)
In San Diego Gas & Electric Company v. Schmidt, 228 Cal. App. 4th 1280 (2014), the court confirmed that the income approach may be used to establish the market value of condemned property. More particularly, the court held that the landowner’s discounted cash flow analysis of royalty payments the owner would likely receive if the subject property were authorized to operate as a gravel mine was properly admitted to establish just compensation. As the court explained, “a defendant may not present evidence of income from a business that is conducted on the condemned property, but may offer proof of rental income from the property itself and any improvements presently in existence.”
Although mining was not authorized on the subject property at the time of trial, a 950 acre mine was located directly adjacent to the subject property, and the operator of that mine had had expressed interest in leasing the land for mining. The owner’s entitlement expert persuaded the jury that there was a reasonable probability of obtaining the necessary entitlements for mining by testifying that a significant shortage in local aggregate supplies existed, local demand could not be met from existing permitted quarries, and that the expert had been successful 100 percent of the time in assisting other mining operators in securing permits for other mining operations in that area. Not surprisingly, the court of appeal concluded that the jury could reasonably conclude from this evidence that obtaining a local mining permit was reasonably probable.
The court also affirmed the jury’s substantial condemnation award, which was based on the present value of royalty payments a mine operator would likely pay for mining the estimated 127 million tons of aggregate located on the property, at 2 million tons per year. The owner’s expert addressed the uncertainty involved in the owner’s ability to actually secure the necessary “major use permit” by factoring in a 50 percent “surcharge” to the discounted cash flow analysis. The jury evidently found this testimony persuasive because it adopted the owner’s valuation opinion with only minor adjustments. Schmidt thus stands for the proposition that a discounted cash flow analysis can be a viable method for establishing just compensation for lands containing valuable mineral resources.
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